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Publish On: 2018-12-10

Ben joy

Total Post: 542

Question: What are the types of cost involved in factoring

Reply On: 2017-05-24

creditupflow77

Total Post: 0

ANS: What are the types of cost involved in factoring

There are two types of factors involved :

The factoring commission which is used to cover the bad dept  and Second is interest on advance granted by the factor to the firm.

Sky Blue Credit Repair
Reply On: 2013-09-02

Ben joy

Total Post: 542

ANS: What are the types of cost involved in factoring

There are two types of costs involved:

1. The factoring commission or service fee

2. The interest on advance granted by the factor to the firm.

Factoring commission is paid for credit evaluation and collection and other services and to cover bad-debt losses. It is usually expressed as a percentage of full net face value of receivables factored and in developed countries like USA, it ranges between 1 to 3 per cent. In India, a charge of around 2.5 to 3 per cent is envisaged. In fact, factoring commission is expected to be higher for without recourse’ factoring since the factor assumer the entire credit risk.

The interest on advance would be higher than the prevailing prime rate of interest or the bank overdraft rate. In USA. Factors charge a premium ranging between 2 to 5 per cent over and above the prime rate of interest. If this rule is applied to undo where the prime rate of interest on the working capital finance is about 16 per cent, then the interest rate on advances by factors may range between 18 to 23 per cent. However, in the opinion of experts, factors should not charge more then what the banks are charging since they would be in completion with them as regards the financing of receivables.

 

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